Does the Quality of the Plaintiffs' Law Firm Matter in Deal Litigation?

Abstract

This Article examines how the stock market reacts to the filing of lawsuits against mergers and acquisitions targets as the quality of the plaintiffs’ law firm varies. Our primary dataset includes all cases of this type filed in the Delaware Chancery Court from November 2003–September 2008. We group the law firms that file these suits into higher and lower quality categories using several quantitative and qualitative measures. We hypothesize that target firm share value should reflect the likelihood that litigation will result in an increase in merger consideration. This effect is likely to depend, at least in part, on law firm quality. Our evidence is broadly consistent with this hypothesis, and we find similar results when we restrict the analysis to those cases filed several days after the announcement of the deal. Likewise, we find that the effect of law firm quality on firm value endures when we include cases filed after the beginning of the financial crisis. We discuss the implications of these results for debates about the value of corporate litigation.